1. Use Employee Benefits as a Tool to Attract and Retain Great Workers. There is no law requiring you to offer health insurance or other benefits. Benefits are something special; you should promote the benefits you offer to attract and keep the best workers possible. It's interesting - government required benefits such as workers compensation, unemployment income insurance, and state disability, do nothing to attract and retain employees. On the other hand, non-mandatory benefits such as health, dental and life insurance, disability income insurance and pension plans do wonders to entice employees to work for you.

2. Take advantage of the tax incentives to purchase benefits. Most benefits are tax deductible for employers and non-taxable as compensation for employees. Basically, paying an employee extra salary so that he or she can buy health insurance means that you, the employer, pay tax on the salary spent on health insurance at the same time as the employee pays tax on the salary spent on health insurance. Worker’s compensation, Social Security, Medicare, State Disability Insurance, Unemployment Training Tax, and Federal and State Income Taxes can add 30-40% when an employee pays for benefits with after tax dollars.  (See below, The Problem with Salary Bonuses to Pay Health Insurance).  Also: Some employers think that they’ve got to pay bonus salary to pay for senior management’s health insurance, since they can’t afford to pay for health insurance for rank-and-file employees. This is not necessarily true. Health insurance companies allow “management carve-outs,” which allow you to purchase insurance for a select class of employees. There are some specific issues that need to be explored before you decide to take this route, but the tax savings of the employer paying for health insurance rather than the employee are huge.

3. Use your competitors to figure out which benefits you should offer. Check out companies in your industry and other companies that might hire your employees. If they offer great benefits, your employees will expect the same. But there are many ways to “slice a pie,” so even if competitors offer Cadillac benefits you may be able to meet your employees’ needs and also make your payroll, rent, marketing costs, etc. For additional information see below, Buying Health Insurance: Like Slicing a Pie.  One excellent source of information on other companies are reports by WetFeet.com.

4. Realize that not all employees need or expect the same benefits. You can offer different benefits to different employees, depending on your type of business and the type of employees you’re trying to attract or keep. For example, you could offer different employees different health plans, ranging from a bare-bones HMO to a premier HMO, a POS, or the Cadillac, a PPO plan. You should tailor your health plan and other benefits to match the needs and expectations of your employees as well as the size of your pocketbook.

5. Offer bare-bones benefits to start, then expand the package as your company grows.  Having basic benefits in place may allow you to hire people at a lower wage than you would if no benefits were offered.  Couple this downward pressure on wages with the heavy tax incentives (below) that federal and state governments give companies when they pay for employees’ health insurance, and it makes a lot of financial sense to offer at least a bare-bones benefits package to employees from the start. One easy way to start is to tell prospective employees that your company will pay $100 per month (equal to about 50 cents per hour in salary) towards a health insurance plan and the employee pays the balance. As your company prospers you can pay more for the employee and get the full tax benefit of employee benefits.

Some employers prefer giving their employees more money and letting them purchase their own insurance. Unfortunately, this strategy costs employer and employee a lot of money. The reason: taxes. When employees buy insurance on their own, they pay with after-tax dollars. It makes much more sense to set up a company insurance plan than pay a salary bonus so employees can buy insurance. Here’s an example to show you how this is true:

Cost of health insurance for single employee under age 30: $100/month

  Tax Incentives for Group Health, Dental, and Life Insurance

We’re not lawyers or accountants, and we don’t give legal or tax advice. We can, however, quote from IRS and California EDD publications that describe how health, dental, and life insurance employee benefits are treated for tax purposes. (For an example of the tax impact of an employer paying for health insurance see above, The Problem with Paying Health Insurance by a Salary Bonus.)

As you can see below, the tax treatment of these benefits provides a valuable incentive to employers to pay for employee health, dental, and life insurance plans. Tax laws allow you to pay your employees with benefits without you or your employees having to pay taxes on those benefits.

Federal Tax Treatment

“Health Insurance Plans: If you pay the cost of an accident or health insurance plan for your employees, which may include an employee’s spouse and dependents, your payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or income tax withholding. Generally, this exclusion applies to qualified long-term care insurance contracts.”

(Source: Dept. of the Treasury, Internal Revenue Service, Publication 15, “Circular E, Employer’s Tax Guide,” revised 1/99, p. 9)

California State Tax Treatment

Health Plans: Employer-provided coverage under accident or health plans or medical expense reimbursements:

Unemployment Insurance: Exempt

Employment Training Tax: Exempt

State Disability Insurance: Exempt

Personal Income Tax Withholding: Not subject (except 2% shareholder-employees of S corps.)

Personal Income Tax Wages: Not subject (except 2% shareholder-employees of S corps.)

Life insurance premiums paid on behalf of employees:

Unemployment Insurance: Exempt

Employment Training Tax: Exempt

State Disability Insurance: Exempt

Personal Income Tax Withholding: Not subject if group term life insurance

Personal Income Tax Wages: Not subject if group term life insurance

(Source: State of California, Employment Development Dept., DE 44, Rev.24 (9-97), “1998 Calif. Employer’s Guide,” p. 91.)

When an employee pays a portion of the premium for his or her health, dental, or vision insurance, we can help you set up a Section 125 plan (also known as Cafeteria Plans). This type of plan enables employees to pay their premium before taxes are deducted from their paycheck; employees save money, because they only pay taxes on the salary they receive after making premium payments. A Section 125 plan also saves the employer money, because the employer’s FICA and worker’s compensation payments are based on the salary after the employee-paid portion of the health, dental, and life insurance premium has been deducted.

It’s important to know that your company can’t just start deducting employees’ premium payments on a pre-tax basis without setting up a specific plan legally. The IRS authorizes Cafeteria Plans under Section 125 of the Internal Revenue Code. To set up an acceptable plan, you need the following:

• Plan document

• Summary plan description

• Corporate resolution

• Introductory letter

• Enrollment forms

• Discrimination testing

• Dept. of Labor filings

• Payroll Dept. consulting

• Completed and filed IRS Form 5500

• Communication with employees

Professional Benefits & Insurance Services can quickly and easily get proposals from companies to help you set up a Section 125 plan for your company.

How A Section 125 Premium-Only Plan Saves Money

Health care plans can differ in hundreds of ways. We simplify the process of comparing different plans by focusing on three factors: benefits, price, and providers.

1. Benefits: Once you’ve narrowed down the type of plan and the general benefits you’re interested in, you should look closely at the details of what’s covered and what’s excluded in specific plans. We advise looking at just a few of the most important benefits, like those listed below:

• Doctor’s office visit co-payment, which can range from $5 to $20 per visit

• Hospital co-insurance percentage, which is typically 100 percent to 80 percent

• Prescription medicine co-payment for generic and brand-name drugs

• Out-of-pocket maximum, or ”stop loss,” after which the insurance company pays 100 percent of costs.

2. Price: On a monthly basis, how does the price for a plan compare to other plans with similar benefits? Everyone wants the lowest priced plan with the most/best benefits; we can help you understand the trade-off between benefits and price.  See How Do Insurance Companies Price Health Insurance?  There are many ways to lower your cost and still offer your employees top-quality health insurance plans. You should explore some of the innovative plan designs including:

Carve-Out Plans

Stand Along Plans

Mix and Match Plans

Employee Buy Up Option

3. Providers: This is where the rubber meets the road. Are the doctors that you and your employees want in the provider network of the plans you’re considering? We can help you compare different plans’ provider networks. We can also give you advice on provider-related issues like how best to choose providers and different plans’ policies regarding changing providers. (Regarding the first issue: While word-of mouth referral is a popular way of finding a doctor, it may not be the best way; your preferences and medical condition may be vastly different from those of other people. If you’re looking for a primary care physician (PCP), we recommend visiting the office of the doctor you’re considering and speaking with the people there; see if you have a positive experience. Regarding the second issue: Most HMOs allow you to change your PCP once a month, if you notify the insurance company by the 15th of the month for a change beginning the first of the following month.)

There are many ways to slice the health insurance pie - and many flavors of pie, for that matter. For example, business owners may need an expensive medical plan for themselves and for hard-to-recruit employees. We can set up a fancy plan for you and some key employees and couple it with a more modest plan for other employees, in effect creating one pie with two flavors.  See Carve-Out Plans and Stand Along Plans. You can then slice the pie in a variety of ways -- say, by letting your employees share in the cost of the plan, in effect slicing the pie a bit differently than if the company were to pay 100 percent of the plan’s cost.  See Employee Buy Up Option.